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Richard Vedder: Change supply, demand for higher education

President Obama keeps declaring war on rising college costs. In a speech at Knox College last month, he vowed to unveil an “aggressive strategy to shake up the system, tackle rising costs and improve value.” He said something similar in his 2012 State of the Union address, so I’m a little skeptical that much will happen.

As students get ready to go to college this month, let me suggest ways to “shake up the system” and “tackle rising costs.” In doing so, I would point out that two things lead to higher prices: rising demand and falling supply. Any efficient solution to the explosion in college tuition and fees must either dampen demand or increase supply. With that in mind, here is a five-point federal-action plan.

First, scale back federal student loans and related government programs. The increased demand for higher education in recent decades partly results from the explosive growth of these programs. They were originally intended to help poor people gain access to college, yet they have probably had the opposite effect, pushing up the sticker prices of colleges substantially. The easy money has helped fuel an academic arms race that provides amenities such as climbing walls and luxury student centers that entice kids from higher-income families but scare poor students away. The proportion of recent college graduates from low-income backgrounds has fallen since the federal student-assistance programs became large.

Cut out loans to affluent parents. Eliminate the federal tuition tax credit. Put stricter time limits on student borrowing. Ultimately, the goal should be for the federal government to get out of the student-loan business altogether.

Second, require colleges participating in federal student-assistance programs to share some costs associated with high loan-default rates. Some colleges admit students they know have low probability of academic success and into majors that employers aren’t interested in. One-third of loans are either delinquent or in default. This means despair for borrowers and burdens on taxpayers but revenue for colleges accepting many marginal students. If they had to cover some of the cost of defaults, schools would be encouraged to accept fewer students, reducing demand and the ability to raise tuition.

Third, substantially improve consumer information. Lots of students enter college based on bad advice, often from guidance counselors and school marketing efforts. Politicians make things worse with a “college for all” mantra, implying life will be a failure without a college degree to provide the ticket to the moderately affluent middle class.

To counteract the propaganda, a bill proposed by Sens. Ron Wyden, D-Ore., and Marco Rubio, R-Fla., would mandate the disclosure of information regarding postgraduation earnings of students by college and major. Polls show that college students’ single biggest goal is achieving financial success. With more information, they and their parents might be more realistic. They can see how many graduates are in McJobs, becoming sales clerks, bartenders, janitors – the employment class they were promised they could escape.

Fourth, develop new ways to demonstrate potential workplace competence. Colleges are screening devices; a diploma is meant to convey that a person who holds a degree is likely to be smarter, more knowledgeable, more disciplined and even more honest on average than others of the same age. But there are other, cheaper ways of providing that function. Why doesn’t someone (College Board? Educational Testing Service? Google?) develop a national college equivalency examination that tests for the critical learning skills, literacy and basic knowledge that all college graduates are expected to have?

There are also less expensive ways of packaging courses into degrees. Instead of taking 40 courses at a single university and calling the whole package a degree, allow students to take courses from perhaps eight to 10 providers, some taught in traditional ways and others online, and have course aggregators (another name for “university”) evaluate credits and confer degrees. If students are taking the college exam at the end of their schooling, the worries that online classes will dumb down education are greatly reduced.

Fifth, expand supply by eliminating barriers to entry. The previous ideas largely lower prices by dampening demand for traditional degrees. But there are barriers to entry that lower competition and thus supply.

The single largest obstacle is the dysfunctional accrediting system, which is rife with conflicts of interest and gives consumers little information. The crude nature of its assessments (colleges either are or aren’t accredited, with not much in between) discourages new providers. Arguably, we should eliminate accreditation as such, with the government simply defunding programs that fail to meet minimum standards (such as institutions with student-loan default rates greater than graduation rates).

The list above isn’t exhaustive. But it suggests measures that collectively might reduce the college-cost gap – a widening divide that is worsening national inequality and is unsustainable in the long run.

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